Sunday, April 4, 2010

Businesses, not jobs; self-employment not employment

In March of 2010, the US economy added approximately 162,000 jobs--the largest expansion of payrolls in three years.

By most measures, this bit of economic data would be cause for celebration, but the details of those jobs does much to dampen the celebration of the moment.A significant proportion of those jobs were government jobs brought on by the decennial census (and which will disappear again after just a few months as a result), and while total private-sector payroll growth was 123,000 jobs, the overall unemployment rate remained at 9.7%. The economic impact of these jobs may be fairly summarized thusly:

The economy is growing again, but at a pace unlikely to quickly replace the 8.4 million jobs erased in the recession that began in late 2007. More than 11 million people are drawing unemployment insurance benefits.

Larry Summers, director of the National Economic Council, acknowledged that employment in this country still "has a long way to go." When Treasury Secretary Timothy Geithner appeared on the Today show, he informed host Matt Lauer that unemployment "is still terribly high and is going to stay unacceptably high for a long time." Even though the jobs outlook in this country improved, the palpable effect of that improvement is practically nil.

Here’s my fun fact for the day, provided courtesy of Robert Litan, who directs research at the Kauffman Foundation, which specializes in promoting innovation in America: “Between 1980 and 2005, virtually all net new jobs created in the U.S. were created by firms that were 5 years old or less,” said Litan. “That is about 40 million jobs. That means the established firms created no new net jobs during that period.”

Friedman's restatement is equally thought provoking:

Message: If we want to bring down unemployment in a sustainable way, neither rescuing General Motors nor funding more road construction will do it. We need to create a big bushel of new companies — fast.

In 2002, companies with 500 or more employees had a total of 56,034,362 employees. Total number of paid employees in companies of all sizes was 112,400,654.

In 2004, companies with 500 or more employees had a total of 56,477,472 employees. Total number of paid employees in companies of all sizes was 115,074,924.

In 2002, there were 17,646,062 firms that had no paid employees.

In 2004, there were 19,523,741 firms that had no paid employees.

From 1988 to 2003, there was only one year, 2001, when companies with 500 or more employees supported more than 50% of all paid employees for that year. In all other years companies with 500 or more employees accounted for less than half of all paid employees for that year.

These results may be summarized thus: small companies (and, extending Litan, new companies) create and sustain the bulk of all jobs in this country. If President Obama is indeed "preoccupied" with creating jobs, he is focused on the wrong target. Friedman has the sense of it: America will find jobs by creating new businesses. Business growth drives jobs growth--that is the logical extrapolation of Litan's data.

Moreover, Americans as a whole are focused on the wrong target. Instead of seeking out a new job at a new employer, Americans should seek to create new businesses instead. If the primary engine of economic activity in this country is the small business--is the new business--then the solution to this nation's somnolent economy will be found not through employment but through self-employment.

The worker-as-business owner would be, in essence, a return to the fundamentals of capitalism as articulated by Adam Smith in his treatise Wealth of Nations. Smith's conceptualization of labor begins with the worker functioning as an independent entity:

In that original state of things, which precedes both the appropriation of land and the accumulation of stock, the whole produce of labour belongs to the labourer.

This situation begins to change with the introduction of private property, which separates other resources from the resource of labor:

As soon as land becomes private property, the landlord demands a share of almost all the produce which the labourer can either raise, or collect from it. His rent makes the first deduction from the produce of the labour which is employed upon land.

It seldom happens that the person who tills the ground has wherewithal to maintain himself till he reaps the harvest. His maintenance is generally advanced to him from the stock of a master, the farmer who employs him, and who would have no interest to employ him, unless he was to share in the produce of his labour, or unless his stock was to be replaced to him with a profit. This profit makes a second deduction from the produce of the labour which is employed upon land.

It is important to note from the nature of Smith's language that he formulated his economic theories in an era before mass industrialization, and attributes to the individual worker the initial ownership and dominion over the fruits of his labor. Switching to Karl Marx's epic Das Kapital, we find a considerably different view of labor:

THE change of value that occurs in the case of money intended to be converted into capital, cannot take place in the money itself, since in its function of means of purchase and of payment, it does no more than realise the price of the commodity it buys or pays for; and, as hard cash, it is value petrified, never varying. Just as little can it originate in the second act of circulation, the re-sale of the commodity, which does no more than transform the article from its bodily form back again into its money-form. The change must, therefore, take place in the commodity bought by the first act, M—C, but not in its value, for equivalents are exchanged, and the commodity is paid for at its full value. We are, therefore, forced to the conclusion that the change originates in the use-value, as such of the commodity, i.e., in its consumption. In order to be able to extract value from the consumption of a commodity, our friend, Moneybags, must be so lucky as to find, within the sphere of circulation, in the market, a commodity, whose use-value possesses the peculiar property of being a source of value, whose actual consumption, therefore, is itself an embodiment of labour, and, consequently, a creation of value. The possessor of money does find on the market such a special commodity in capacity for labour or labour-power.

By labour-power or capacity for labour is to be understood the aggregate of these mental and physical capabilities existing in a human being, which he exercises whenever he produces a use-value of any description.

But in order that our owner of money may be able to find labour-power offered for sale as a commodity, various conditions must first be fulfilled. The exchange of commodities of itself implies no other relations of dependence than those which result from its own nature. On this assumption, labour-power can appear upon the market as a commodity only if, and so far as, its possessor, the individual whose labour-power it is, offers it for sale, or sells it, as a commodity. In order that he may be able to do this, he must have it at his disposal, must be the untrammelled owner of his capacity for labour, i.e., of his person. He and the owner of money meet in the market, and deal with each other as on the basis of equal rights, with this difference alone, that one is buyer, the other seller; both, therefore, equal in the eyes of the law. The continuance of this relation demands that the owner of the labour-power should sell it only for a definite period, for if he were to sell it rump and stump, once for all, he would be selling himself, converting himself from a free man into a slave, from an owner of a commodity into a commodity. He must constantly look upon his labour-power as his own property, his own commodity, and this he can only do by placing it at the disposal of the buyer temporarily, for a definite period of time. By this means alone can he avoid renouncing his rights of ownership over it.

In the modern era, Marx's view of labor and, thus, of jobs, certainly seems more attuned to the reality. Certainly workers at Ford, Caterpillar or even Microsoft do not appear to have any initial claim on the fruits of their labors. These workers, if one follows Marx, are a commodity, something bought and ultimately sold along with the raw materials that go into any manufacturing process.

A governmental focus on jobs plays into this thinking: jobs are created by providing incentives for companies to hire more workers--to purchase more labor. Yet, looking back to Litan's job creation comment, companies appear not to want to purchase more labor; over time, companies if anything strive to purchase less labor.

Might Marx have been wrong? Might labor be something besides a commodity to be bought and sold? Friedman certainly gives one cause to think so:

But you cannot say this often enough: Good-paying jobs don’t come from bailouts. They come from start-ups. And where do start-ups come from? They come from smart, creative, inspired risk-takers.

What Friedman points out, what Smith has right, and what Marx has wrong, is the realization that the benefit of labor is the creation of value, and, as a direct consequence, can never be regarded as a commodity to be bought and sold merely. All labor must be in its essence a creative undertaking. "Good" jobs, therefore--jobs with significant pay and stature--come from new ventures seeking new ways to produce, or sell, or distrubute (or all of the above). Good jobs come from new companies, not established ones. Good jobs, then, are the result of individuals seeking new ways to impart value upon human effort. Good jobs are reflect Adam Smith and not Karl Marx.

Thus, for all the governmental focus on spurring the creation of jobs, such efforts are doomed to failure--certainly the application to date of the American Recovery and Reinvestment Act has failed to produce the upturn in employment forecast by Presidential economic advisors Christine Romer and Jared Bernstein. These efforts fail because they do not address the fundamental aspect of value creation that defines the "good job".

Echoing Friedman, and recalling Adam Smith, it is not enough to merely speak of jobs. A thriving economy must speak of and dwell upon business. Each person must, in thought if not in reality, become an enterprise unto himself. Government policy must encourage such thoughts and encourage individuals to translate such thoughts into action, to create new businesses and new engines of value creation. Instead of 162,000 new jobs, America's goal should be 162,000 new businesses.